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Comment letters are informal public correspondence between the SEC and public companies about potential disclosure, accounting, or other issues in public filings. There are ~150 letters every week, many of which are not relevant for investors. This newsletter sifts through them all to highlight the ones that deserve extra scrutiny.
Adagene (NASDAQ: ADAG — $937 million), a Chinese immunotherapy company that went public in February, received multiple SEC comment letters about related-party transactions, misleading drug descriptions, confusing labels, delisting risk, and cash flow line items. The main letter read, in part,
“We note your updated graphics … appear illegible. In addition, we note the graphics contain technical jargon, including “RP2D” and “Traditional 3+3,” and elsewhere in your registration statement we note technical terms, such as “SUV scores.” Define these terms in a way that a lay person can understand.”
“Please update your executive compensation disclosure to include your recently completed fiscal year.”
“As verbally requested on January 26, 2021 and January 28, 2021, please provide us with the number of options granted for each grant date….”
“While we note that your consolidated statements of cash flows includes separate line items for cash transactions with related parties, the parent only statements of cash flows does not include these line items. As previously requested, please disclose the related party transactions…”
LoanDepot (NYSE: LDI — $6.69 billion), a mortgage originator that went public in February, received a comment letter that scrutinized its pre-IPO adjustments and balance sheet presentation. The letter read, in part,
SEC: “We note your presentation of a pro forma negative cash balance of $(33,496) here and $(38,496) on your unaudited pro forma consolidated balance sheet on page 97. Tell us why you believe, with reference to authoritative literature, it is appropriate to present a pro forma negative cash balance, as opposed to a liability or other presentation.”
Company: “We do not have specific authoritative literature to determine that the presentation of a negative cash balance is appropriate and thus we have revised the presentation to reclassify the negative cash balance and included within other liabilities on the Pro Forma Balance Sheet.”
Syneos Health (NASDAQ: SYNH — $7.70 billion), “the only fully integrated biopharmaceutical solutions company,” received an SEC comment letter about its revenue recognition, cash pooling arrangements, and its overuse of non-GAAP metrics:
We note the following in regards to your presentation of non-GAAP financial measures in the “Highlights” section of your earnings release:
•Discussion is provided regarding Q3 growth of your “Adjusted diluted earnings per share” and “Adjusted EBITDA” measures without providing similar discussion for the comparable GAAP measure;
•Presentation is provided of your “Adjusted EBITDA margin” without providing similar presentation of the comparable GAAP measure;
•In the second to last bullet point, you highlight your “adjusted EBITDA” and "adjusted diluted earnings per share" guidance without providing comparable GAAP guidance.
When presenting non-GAAP measures in your earnings release, please present the most directly comparable GAAP measure with equal or greater prominence.
The SEC sent Syneos a follow-up letter that asked for more detail on its revenue recognition, revenue segment disclosures, and accounting charges.
Syneos has had four different chairmen over the last five years.
Cloopen Group Holding (NYSE: RAAS — $2.70 billion), a Chinese cloud-based communications company that went public one month ago, received multiple SEC comment letters about its related-party transactions, Series E preferred shares, subscription revenue disclosures, and stock-based compensation. The letter read, in part,
“We note … that the termination of certain transactions with existing customers in the online consumer finance industry resulted in a decrease to your existing customer base and related revenues in 2019. Please separately quantify the impact on CPaaS and cloud-based CC revenues related to these terminated arrangements. In addition, discuss the negative impact on revenue from voice calls due to regulatory changes…”
Perspecta (NYSE: PRSP — $4.66 billion), a U.S. government services company that is in the process of being acquired by Peraton, received a comment letter about its non-GAAP metrics:
“We note you provide the non-GAAP measure, Adjusted Free Cash Flow. Please tell us what consideration was given to the guidance in Item 10(e)(ii)(A) of Regulation S-K, which states that non-GAAP liquidity measures must not exclude charges or liabilities that required, or will require, cash settlement absent an ability to settle in another manner. Please explain or revise your disclosure accordingly.”
“We note you provide the non-GAAP measure, Adjusted diluted EPS. Please provide a reconciliation to GAAP diluted EPS.”
“Your disclosures include additional Non-GAAP measures that include Adjusted EBITDA, excluding NGEN SMIT, Adjusted net income, excluding NGEN SMIT, and Adjusted diluted EPS, excluding NGEN SMIT. Tell us your consideration of providing a reconciliation for each of these Non-GAAP measures.”
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Please note that comment letters are generally made public with a delay of at least one month. As a result, many of the comment letters profiled may appear dated, even though they are recently uploaded.
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Until next week,
Comment Letter King